The government’s leasehold reforms are now moving fast and it wants to include a cap on existing ground rents without prompting a judicial review from the freehold punters who have bought them up.
The government is offering five options to remove ground rents, and wants to know which leaseholders would prefer.
This means yet another consultation, and it is essential that leaseholders respond: those who have seen sales fall through; mortgages refused; living in retirement sites; or have been pursued with eye-watering fees from debt collectors because the ground rent demand either was sent to the wrong address, or wasn’t issued at all .
LKP is urging that all ground rents be set at a peppercorn in order to avoid the creation of a two-tier market, and that leaseholders should choose this option.
The government website announcing the consultation reads:
“We understand that freeholders, collectively, would very likely lose revenue as a result of implementing a cap on existing ground rents. The scale of this loss may be dependent on which option of a cap was taken further. Regardless of the option taken forward, we would not expect to compensate freeholders for lost revenue, nor do we expect freeholders would be able to capitalise this lost income stream through other means.”
The government is consulting not because it is unaware that ground rent games are gamed by big freehold owning funds like Long Harbour, Tchenguiz Family Trust, Wallace Estates, E&J Estates, Pier / Regis and all the rest of the private equity gameplayers – some of the richest people on the planet, and usually offshore – represented by the Residential Freeholders Association.
The government is also aware of unsavoury characters like Martin Paine, who does a bit of trickery when leases need extending to return doubling ground rents back to the date when the lease was first issued, resulting in poorer families facing ground rents of £8,000 a year.
Sir Peter Bottomley described this gentleman’s trickery as “turning the sleaze of lease into an artform”.
Nonetheless, his unfortunate victims should respond to the consultation
The essential way to respond is to fill out the online survey here:
Michael Gove, secretary of state for housing, announces the consultation saying:
“There is no legal requirement for these ground rents to be reasonable or linked to any service provided.
“While a freeholder or investor may see ground rent as a useful income stream for a leaseholder it can appear to be simply an annual reminder that you do not own the land your home stands on, that your lease on it is finite, and that there is a payment for the privilege of staying there.
“It is a historical anachronism, already eliminated for new leases, and we now wish to take action to help those with existing leases.”
A core argument in favour of a ground rent cap is that leaseholders should only pay for costs from which they gain material benefits. Service charges already exist to cover the cost of delivering management and maintenance of the block.
The government states: “We believe that more frequent inflation linked increases [in ground rent] which were previously rare, have become the common ratchet by which ground rents increase.”
The government sets out five options:
- capping ground rents at a peppercorn
- setting maximum financial value for ground rent
- capping ground rents at a percentage of the property value,
- limiting ground rent to the original value when the lease was agreed
- freezing ground rent at current levels
The government document points out that investors in ground rents contract out the management of their sites to third party management companies: “So, from the outset, leaseholders are faced with a complex management structure that they have had no say in, all because of ground rent.”
The average ground rent according to the English Housing Survey 2021-22 was £298.
It is stated that 78% of estate agents in Propertymark (formerly National Association of Estate Agents) reported that a leasehold property with an escalating ground rent will struggle to sell, even if priced correctly.
But an escalating ground rent is the scenario faced by the majority of leaseholders who have bought a new build property after 2000.
The Competition and Market Authority (CMA) estimated in February 2020 that this affected 670,000 new-build leasehold flats and over 100,000 new build leasehold houses.
Option 1: Capping ground rent at a peppercorn
“This would remove the obligation to pay a financial ground rent from a given date. In theory the freeholder could still demand the ‘peppercorn’, but in effect it would mean that there was no ground rent to pay.
“This proposal would align ground rents in existing and new leases. It also has historical precedent– before the 20th century, instead of requiring a financial ground rent, many ground rents were set at a ‘peppercorn’, to save the freeholder having to collect the nominal rent. Additionally, this approach would also protect leaseholders from being required to make a payment for no explicit services in return.
This is interesting:
Through the Building Safety Fund and the Cladding Safety Scheme, the government already provides funding to freeholders who need to remediate cladding on their blocks (if they are the party with the legal right to carry out the works to the building). For non-cladding related defects, we understand that freeholders may need to raise funds to meet such costs and that contributions from qualified leaseholders are firmly capped and spread over 10 years. However, we are also aware that many freeholders who are responsible for these buildings have other avenues available to raise funds to meet their remediation obligations. If evidence exists that freeholder’s ability to meet their obligations will be detrimentally impacted by a peppercorn cap on ground rents, we encourage stakeholders to share it
Option 2: Capping ground rent at an absolute maximum value
“This would mean that there would be an upper financial value that ground rents could rise to. Ground rents which are currently below that amount would be permitted to rise to that value, but never to exceed it.
“We see merit in the simplicity of this option, in that it would be clear to freeholders and leaseholders alike over the highest financial value which could be charged for a ground rent. It would also put an end to some of the most troubling examples of current practice while having lower impacts on freeholders and investors than a peppercorn.
“However, this option would not achieve a fundamental change to the ground rent practices and eliminate the anachronism of ground rents for existing leases. It would fail to resolve the issue of leaseholders paying a charge without receiving a transparent service in return and does not deliver fairness and equality between new and existing leaseholders.”
Option 3: Capping ground rents at a percentage of the property value
“.. there was no consensus on what an onerous ground rent term is in practice nor on what percentage of the value the cap should be set at. At a high level this option would likely have lower impacts on freeholders than a peppercorn but lower benefits for leaseholders.
“The percentage that we hear called for most often is a cap of 0.1% of the property value, on the basis that ground rent above this can adversely affect a person’s ability to get a mortgage on that property, according to the criteria set by some mortgage providers.
“We have concerns that pursuing this approach could be difficult to implement and enforce, in practice requiring a programme of valuation …”
Option 4: Capping ground rent at the original amount it was when the lease was granted
“This option would provide for ground rents to revert to, or remain at, the initial level provided for in a lease. To achieve this, we could legislate to prevent any further escalation beyond the initial amount set out in the lease. This means that there could be no rise in the financial value for the lifetime of the lease.
“This option has merit in that it recognises that there is a contract entered into between the leaseholder and freeholder to pay rent and sets the ground rent obligation to the level that the leaseholder is most likely to have been aware of.
“It may be relatively simple to implement …
Option 5: Freezing ground rent at current levels
“This option would provide for ground rents to remain at the value provided for in the lease at the date that such a measure was implemented …
“This has the advantages of being simple to understand and implement and respects the existing contract … It might also have lesser impacts on the revenue and business models of freeholders than other options and would remove concerns from lenders about future escalations becoming unaffordable for leaseholders with mortgages.
“However, like the other options that continue with a material ground rent, this option does not guarantee equality between new and existing leases and does not fix the problem of leaseholders paying a financial ground rent for no clear service in return.”
“We understand that freeholders, collectively, would very likely lose revenue as a result of implementing a cap on existing ground rents. The scale of this loss may be dependent on which option of a cap was taken further. Regardless of the option taken forward, we would not expect to compensate freeholders for lost revenue, nor do we expect freeholders would be able to capitalise this lost income stream through other means. Where freeholders incur legitimate costs for service provision, they should be met through the service charge.
Regardless of which option government chooses to pursue, we would seek to override existing leases with new terms to apply only to future ground rent payments. This means that following implementation of legislation, leaseholders who receive ground rent demands which exceed the limits of our chosen cap would be able to refuse to pay them.”